A super-sized 110 billion euro bailout was supposed to calm markets, but investors seemed as frantic as ever. Their logic: Greece still has to go through wrenching cuts, and may end up restructuring its debt, which could force current bondholders to take a haircut. And they fear the euro zone won’t have enough money and willpower to keep the crisis from spreading.

Investors ran for cover in the supposedly safe U.S. Treasuries and dollar, pulling the euro down to a fresh 1-year low. Greek bonds were hammered and the cost of protecting Spain, Portugal and Ireland’s debt went higher. Shares of Banco Santander, seen as a proxy for Spain, fell 7 percent.

The problem is still centered in Athens. The yield on two-year Greek government bond rose to around 14 percent, even though the bailout is supposed to provide the country with all the financing it needs for three years. Investors either don’t believe enough money will come through or are pricing in a debt restructuring before the money runs out.

That sounds plausible. The austerity plan will cut into GDP while debts keep mounting. The new funding isn’t particularly cheap either. The 5 percent interest rate is still well above German levels. The Greek government said it had hired Lazard for financial advice, but denied restructuring was being considered. Maybe, but some sort of debt write-down will be hard to avoid.

Contagion has spread too. It’s less rational yet more worrying, because the fear could become self-fulfilling. If Portuguese and Spanish debt cannot be sold at a reasonable price, the EU will be burdened with a string of rescues it cannot easily afford or manage.

The knee-jerk panic could abate soon. But investors’ insistence on putting these diverse economies into a single boat suggests policy makers have a tougher task ahead of them than they hoped. That big rescue package may be just the start of a long slog to keep the euro zone intact.

Big U.S. banks are getting separation anxiety. They don’t want to spin off their lucrative derivatives desks, even into subsidiaries. The idea, which is part of the financial reform legislation being debated in the U.S. Senate, has merit. It would rid the derivatives market of perceived taxpayer support and discourage risky speculation. But international cooperation will be critical.

Some $30 billion of revenue is at stake, so the concern from Wall Street isn’t surprising. The proposal may not survive Senate horse-trading, and even if it does, it’s not clear whether it would require completely severing the derivatives apron strings, or only a loosening by way of separately capitalized derivatives subsidiaries.

Either way, banks have sounded the alarm. The separation would require heaps of new capital — more than $100 billion by one industry estimate. There also would be uncomfortable unwinding pains, including ones related to technological infrastructure and ending of the one-stop financial shop.

Yet Blanche Lincoln, the senator who shoehorned the provision into the bill, reckons there should be a clear division between banking activities the federal government should support or at least — through the Federal Reserve — provide liquidity to, and riskier business it should not. This makes some sense in many ways.

Standalone swap desks would inevitably render derivatives more expensive, and thereby discourage excessive speculation. The set-up also would give banks cover, whether they think they need it or not, from accusations that taxpayer subsidies are backstopping risky trading. If banks find excising swaps desks alone too difficult for clients who want a suite of trading services, they could always return to a full separation of traditional and investment banking functions.

A big problem with the proposal, as written, is that it looks as if it would send much derivatives business to non-U.S. banks. That’s if other jurisdictions didn’t follow suit. U.S. banks would be safer, but at the expense of their competitiveness. Without overseas cooperation, the problem of global systemic risk wouldn’t be getting addressed either. To work effectively, separating banks from their derivatives would benefit from U.S. lawmakers simultaneously bringing international counterparts together.

The lackluster reception for Thursday’s slew of U.S. initial public offerings may be a downer for companies contemplating a public listing on U.S. exchanges, but it shouldn’t be discouraging for everyone else. It suggests investors are still being sensibly choosy even though financial markets are awash with easy money.

There has been plenty of talk of bubble trouble. Rock bottom interest rates around the developed world and the return of infectious confidence have raised fears that the rapid recovery in stocks and bonds over the past year is unsustainable. Yet investor exuberance doesn’t look completely irrational just yet.

Of the seven IPOs on U.S. stock exchanges on Thursday, all but one — software company SPS Commerce  — initially priced at or below the bottom of their expected ranges the night before. Most of the new stocks did no better than holding steady once they started trading, either. Two fell, including Mitel Networks whose shares dropped around 12 percent on their debut. Three others closed unchanged from their initial prices, while just two managed a first day pop, notably SPS which gained 13 percent.

The clutch of deals made it the busiest day for new listings since November 2007, but it’s hard to argue that investors were knocked over by a wave supply. Deal sizes were below average, with the biggest from investment company THL Credit just shy of $200 million.

Instead, investors seem still to be discriminating, as they have for much of this year. Of the 39 IPOs in 2010, only five have priced above their expected ranges, according to Renaissance Capital.

That’s hardly great news for underwriters keen to clear the backlog of an estimated $20 billion worth of deals. But it’s at least a sign that U.S. markets are still resisting some of the many temptations of easy money.

Greek debt suppliants are playing to thin houses in the United States. The target for a dollar-denominated bond sale by the euro zone’s problem child once stood at $5-10 billion. That now looks like wishful thinking. A Greek official speaking to Dow Jones Newswires said $1-4 billion is more likely. Investors’ wariness reflects the unsentimental reality of Greece’s predicament.

One blow to a bigger bond sale came from Pacific Investment Management, the giant U.S. bond fund firm. PIMCO told Reuters earlier this week that it would sit the bond sale out. With roughly $1 trillion of assets under management, the group’s vote carries serious weight.

It’s not surprising if U.S. investors are unenthusiastic. A $45 billion euro zone and International Monetary Fund aid package is on the table for Greece — but it hasn’t been decided if or when to pull the trigger, and money hasn’t yet changed hands. More talk between Greek officials, European counterparts and the IMF are set for next week. So there’s a sense of limbo, at least until Greece and its neighbors agree exactly what to do.

Stateside players may also be taking a cold view of Greece’s finances, even allowing for the rescue package. Greece is carrying too much debt and running shortfalls it can’t afford. The government has promised to reduce its deficit to 8.7 percent of GDP this year. Hitting that target would be a start. Restoring trust in its numbers would be another step in the right direction. But both will take time.

Of course, the air is heavy with political posturing, too. Some Greek officials might not mind if it appears the country is struggling to raise debt commercially — that might accelerate or increase the help from Europe and the IMF. And getting more details of the bailout would probably reduce the cost of borrowing. After all, two-year Greek euro-denominated bond spreads narrowed about 0.5 percentage points on Thursday thanks to optimism about the aid package.

Yet while greater clarity might make U.S. investors somewhat more receptive to a Greek offering, it won’t solve the country’s underlying problems. Overcoming those will be another marathon Greece needs to win.

A looming wall of debt can be a scary thing. Nearly $830 billion of risky dollar-denominated corporate debt comes due between 2012 and 2014, according to JPMorgan. At first sight that casts a long shadow over credit markets. But borrowers like Cablevision <CVC.N> are already tweaking their obligations. By the time 2012 comes around, the wall will be much smaller.

In fact half the debt in question doesn’t mature until 2014. That means companies and their lenders have some time to pull their bricks out of the wall early — with the help, for the moment, of investors eager to buy new debt.

New York-area cable and internet operator Cablevision Systems took advantage this week. It refinanced debt due in 2012 with $1.25 billion of notes maturing in 2018 and 2020. Moreover, it didn’t have to pay higher interest rates on the new debt than the 8 percent it was paying on the old notes. Cablevision subsidiary CSC Holdings, meanwhile, took $3 billion of its own out of the debt wall by extending maturities into 2015 and 2016.

Cablevision isn’t alone. Charter Communications on March 31 said it extended $3 billion of loans to 2016 from 2014. Harrah’s Entertainment plans to pay off debt that was due in 2010-11 with the cash raised by issuing new bonds that mature in eight years.

Individual efforts to refinance and extend debt may not be enough to completely flatten the wall, but combined they should hammer it down to a much more manageable size. In fact, the wall is already less formidable than it was 15 months ago. Credit Suisse estimates that the volume of leveraged loans due to mature between 2012 and 2015 has fallen by $100 billion since late 2008.

Free flowing credit, of course, is essential to the companies wielding their pickaxes ahead of time. This year it’s been readily available in the junk bond market where nearly all new debt sold in the first quarter of this year will mature in 2015 or later, according to Fitch Ratings. As long as credit investors remain receptive, the 2012-14 debt wall won’t by then be the worrying obstacle it now appears.

Lenders do not seem to be good learners. To judge from the credit market, the 2008-9 crisis might never have happened. Perhaps this is the healthy fading of traumatic memories, but the current buying frenzy looks more like a return to an old bad habit.

It’s hard to find debt that investors don’t like. They are snapping up paper from solidly rated companies such as Wal-Mart and Anheuser-Busch InBev, and from still bankrupt Lyondell Chemical. The enthusiasm has reduced the spread on bonds dramatically.

In the panic-stricken days of March 2009, investment-grade U.S. corporate debt yielded 5.4 percentage points more than U.S. Treasuries. That spread is now just 1.5 percentage points, according to Barclays Capital. For junk bonds, the spread has declined from 17 to 6 percentage points.

The combination of thin risk premiums and the Federal Reserve’s near-zero overnight interest rates makes for unimpressive yields. Barclays clocks the average yield on high-grade bonds at 4.5 percent, which is two percentage points below the 20-year average.

Even traders should be wary. The Fed’s statement that the rate policy would remain for an “extended period” could disappear as soon as April 28. Even a nuanced shift in the direction of higher rates would end the game of ultra-easy money, pushing up Treasury yields in anticipation of a rate hike.

There would be some compensation. Since the Fed will move when the economy looks stronger, risk premiums would be apt to narrow further. But from the current levels, there’s not that much juice left for investors. The spread on investment-grade corporate debt now is just 20 basis points above its long-term average.

And suppose the Fed move does not presage a strong economic recovery. Then the current yields would look like a sucker’s bet.

By Agnes Crane and Antony Currie

Investors seem remarkably relaxed about the end of the U.S. Federal Reserve’s $1.25 trillion program to buy mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac.

Just a few months ago many worried that, without the central bank’s continued intervention, home loans could become expensive enough to scare off prospective buyers and send the market into a renewed slump. Now they’re regarding the Fed’s exit as little more than a minor blip. But that could be a sign that complacency is seeping back into the financial system.

Granted, there are reasons to explain investors’ sanguine view, and timing has much to do with it. For starters, a lot of traditional buyers of these agency mortgage bonds have either stayed on the sidelines or bought far fewer bonds than their portfolio allotments allow. They, along with index funds, now account for 18 percent of the market, down from 25 percent before the Fed stepped in, according to Credit Suisse.

But many don’t have too many other investment opportunities right now that match their stringent criteria, meaning they may move into any gap left by the Fed. Banks with cash to spare after boosting their capital levels are obvious potential buyers, too, as JPMorgan <JPM.N> boss Jamie Dimon pointed out at a conference last month.

Bondholders are also about to receive a windfall. Credit Suisse estimates that Fannie and Freddie will put $136 billion back into mortgage bond investors’ hands between April and June as they purchase bad loans from the pools of mortgages underlying existing bonds. That should take the sting out of the Fed’s withdrawal. Assuming investors plow that money back into the market, those dollars would be enough to replace the central bank’s recent buying volume for three to four months.

All in, market-watchers seem to think the end of the Fed program should have little impact. Many expect mortgage bond spreads, or risk premiums, to widen by only 0.15 to 0.2 percentage point, only a marginal retreat from the roughly 1.5 percentage point decrease in spreads since the height of the panic in November 2008. There’s just too much money waiting to pounce on any weakness in the market for spreads to increase more than that, the argument goes.

The buyout buzz is back. A growing number of publicly listed companies have become the subject of private equity stalking rumors. Harley-Davidson, RadioShack and Supervalu have all had the treatment recently. But bigger examples are likely to remain scarce for now.

The stunning recovery in credit markets accounts for a big part of the momentum. Leveraged loans have come along for the ride, surging from their troughs of around 70 cents on the dollar to trade above par on the Markit benchmark index.

The high-yield market is providing still more fodder for market chatter. Risk premiums continue to slide even though companies are flooding the market with new debt deals. For a hefty equity check in the range of 40-45 percent for a larger deal, bankers say another $3 billion might be available to borrow.

Some individual loans might be sellable too. For the right company, banks could probably find buyers for a $2.5 billion issue, Barclays Capital estimates. That view sounds optimistic though. Others put the cap at $1.5 billion.

These marginal improvements, however, don’t reflect the broader reality. It was a healthy loan market that made heady mega-deals of yesteryear, like the $32 billion takeover of energy giant TXU, possible. And that market has barely reawakened from the crisis-induced drought that killed off its biggest patron: the collateralized loan obligation.

These structured products — close cousins to the maligned collateralized debt obligations that snaffled up subprime mortgages — took on nearly 60 percent of carved-up leveraged loans during the boom, and helped provide the necessary reassurance to private equity firms and banks that bigger and riskier deals could be funded.

For now, investors can’t see anywhere near the returns necessary to revive the market for them. There were recent rumblings in credit circles that one small CLO was in the market.

Home ownership in the United States ranks up there with apple pie and motherhood. The government has championed it for decades, through tax breaks, mortgage guarantees and most recently the Herculean task of keeping Americans in their homes after the housing market collapse. But government subsidies of the American Dream also have a darker side: when things head south, taxpayers end up on the hook.

Government-run mortgage agencies Fannie Mae  and Freddie Mac owned more than 131,000 properties between them at the end of 2009, according to recent annual filings. That’s roughly the equivalent of San Francisco’s owner-occupied housing stock — and it’s up substantially from 2008, despite the two giant companies’ efforts last year offloading nearly 200,000 units that they ended up with after their previous owners defaulted.

And things are set to get worse. Barclays Capital estimates the pipeline of severely troubled loans at around 5 million across the United States. Modification programs, which should help some borrowers stay in their homes, have also delayed the inevitable forfeiture of many others.

Fannie and Freddie are on the hook because they provided guarantees for the benefit of mortgage investors. Between them, they back around $5 trillion of U.S. home loans. Such support — once implicitly and now explicitly backstopped by the Treasury — has handed borrowers relatively low financing costs for years. Now, though, the result is that aside from the huge financial burden they place on taxpayers, the two companies have been amassing foreclosed properties and, in a few cases, have become landlords.

It’s a tiny part of their operations for now. But if the housing market doesn’t turn around soon, they could find themselves reluctantly managing more properties. And no-one expected — or wants — Fannie and Freddie to become giant public sector landlords.

The immediate task is to clean up the mess, but policymakers need to think about the longer term. That means recognizing that the policy benefit of subsidizing home ownership has reached its limit — and starting to take the government out of the mortgage guarantee business altogether.

The bailout of Freddie Mac is certainly paying dividends. U.S. taxpayers extracted a handsome $4.1 billion payout last year in exchange for their $51.7 billion of support since the 2008 rescue of the housing finance giant. And they’re set to receive an even richer dividend from Freddie this year. But these pounds of flesh make little sense right now. Sure, Freddie managed to get by without any extra public funds in the fourth quarter. A more hospitable market for mortgage-backed securities helped. But Freddie is far from done tapping government coffers. The U.S. Treasury’s equity line initially was supposed to be capped at $100 billion. Yet the government was worried enough about the mounting losses late last year that it decided to give Freddie, and onetime rival Fannie Mae, unlimited access for three years. The support comes in the form of senior preferred stock with a 10 percent dividend. It’s similar to the terms Warren Buffett struck with Goldman Sachs, but that life-line helped Goldman move on to generate huge profit. Freddie is still losing money — and taxpayers’ money at that. Freddie gushed $25.7 billion of red ink last year. The dividend isn’t linked to results. If Freddie can navigate the worst housing market in generations without taking another dime from Uncle Sam, it’ll still be on the hook for $5.2 billion in 2010. But that’s an optimistic scenario. The delinquency rate on Freddie’s $2.25 trillion portfolio is still rising, to 3.87 percent in the fourth quarter. Freddie should pay an onerous price for failure — just not while the government still needs it to help turn the housing market around. In that context, the current arrangement is illogical. Every time Freddie draws on taxpayer funds, it needs to use a portion of them to pay taxpayers their dividend. The bigger questions on Freddie — privatize, nationalize or run it down — remain unanswered. Those will probably wait until a recovery is considerably further along. It doesn’t mean, however, that the smaller issues don’t deserve attention. The dividend that is only making a bad situation worse is one of them.